Basel III presents many challenges for treasurers. Steve Everett, Global Head of Cash Management at Royal Bank of Scotland plc, looks at how getting to grips with trapped cash and rethinking investment strategies can help to address them.

Basel III reforms imposing stricter capital and liquidity
requirements on banks may significantly reduce their ability to
lend to clients. As a result, lending rates are expected to
rise and a significant amount of liquidity may be removed from
the market.

Releasing trapped cash

In light of this, post-Basel III, companies will need to
maximize internal liquidity to reduce their reliance on other
sources. The need to release trapped cash will therefore move
higher up the treasurers agenda. Trapped cash, most
significantly, prevents companies from using surplus funds they
hold in one part of the world to offset their borrowing
elsewhere. It can also restrict key strategic investment
decisions and impede global plans for a businesss growth,
by keeping cash within the country where it was generated. In
this context, strict rules on releasing funds from emerging
markets  where many companies have invested heavily
 are a major roadblock.

Broadly speaking, cash may be trapped in some parts of the
world due to local or external factors, or the firm holding
minority shares in that market. Limitations on certain
financial structures, regulatory insistence on compulsory
reserves for loans and deposits, or tax implications for
financial transactions, are all key factors. External causes
include restrictions on investing abroad or intercompany
lending, controls on converting and transferring currencies and
high withholding taxes on dividends paid.

Opportunities as well as challenges

The good news is that cash previously caught behind a
countrys borders is becoming more accessible. Regulatory
reforms dealing with the issue in countries such as China,
India, Russia and Turkey are easing the cross-border flow of
funds and helping companies ensure strong liquidity management
across their business.

For example, companies in India are now able to lend money
to their overseas subsidiaries, as long as it doesnt
exceed 400% of their net worth. Central bank-approved pilot
schemes in China that target cross-border intercompany lending
(in both renminbi and foreign currencies), and cross-border
netting, are enabling firms to tap into internal sources of
liquidity and reduce funding costs. To ensure they manage their
liquidity in the best way possible, companies need to
understand fully what these reforms can enable and how they can
use them in a way that facilitates liquidity and easier cash
flow across their global operations.

At the same time, companies can also benefit from financial
structures designed by banks to help clients manage their
global currency positions. These include cross-border cash
optimization and cross-currency notional pooling, both of which
drive greater value from cash balances that would otherwise
remain trapped in either the affected jurisdiction or a
subsidiary.

Realizing the benefits  a case
study

Maximizing the value of trapped cash involves managing cash
across borders, while maximizing liquidity throughout the
business and aggregating balances to drive improved
returns.

One RBS client  a leading provider of wireless
technology and services with global operations  was
looking to do just this. Of particular concern was how to
enhance the management of, and interest result on, its growing
portfolio of local currency accounts. The treasury team was
looking for a way to increase the interest earned from its
operating balances, without losing the convenience of local
accounts or entering into complex pooling structures. This was
achieved by using our Cross Border Cash Optimization (CBCO)
solution, part of our wider award-winning liquidity offering, a
far less labour-intensive and more cost-effective alternative
to sweeping balances into notional pools according to region
and currency.

Without having to centralize accounts to a single location,
CBCO automatically adds up the different balances and uses the
total  notionally converted into an agreed base currency
 to calculate a bonus interest payment. This benefit is
paid monthly in the currency of the companys choice, in
addition to the monthly interest earned by each local
account.

The company can now enjoy the interest rate advantages of a
single account, together with the practical benefits of local
accounts, while minimizing the time and resources needed to
fund its local operations. Of course, this is just one of the
solutions available, and the needs of each company should be
carefully understood, through working with banking, tax and
legal partners, before taking action.

Any approach to releasing trapped cash needs to be
tailor-made to the company and the regulations involved. For
example, it requires in-depth analysis of the relevant
countries laws, the businesss organizational
structure and its tax set-up.

Companies need to work with banks that have both the global
reach and the local expertise to help them address local
conditions and regulations, so that they can simultaneously
minimize their trapped balances and maximize their liquidity
and working capital efficiency.

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